The Year of the Moving Monkey

“We are just an advanced breed of monkeys on a minor planet of a very average star. But we can understand the Universe. That makes us something very special.”

-Stephen Hawking

In a crazy stock market year like this, it feels somewhat appropriate that it is the Chinese Year of the Monkey. After all, how better to characterize the volatility of global stock markets than comparing them to one of the most frivolous, yet human like animals in the wild kingdom?

Here at Hedgeye, we’ve also used the word "monkey" to refer to the use (by some stock market operators) of 200 and 50-day moving averages to determine buy or sell points on stocks and markets. This positioning occurs despite any supporting evidence that breaking above or below a moving monkey average is actually predictive of a future move.

According to the Chinese Fortune Calendar:

“Therefore, we will deal with more financial events in the year of the Monkey. Monkey is a smart, naughty, wily and vigilant animal. If you want to have good return for your money investment, then you need to outsmart the Monkey”

That sounds like an appropriate 2016 analogy to us.

Back to the Global Macro Grind…

As stock market operators, one of the biggest risks you’ve faced over the last 9 months or so has been the risk of consensus. According to a Bloomberg report this morning:

Stocks with the most hedge fund ownership in the Russell 3000 have declined -31% since July 2015 compared to the SP500, which is down -2.8%;

An index tracking the companies with the most concentrated ownership have declined -45% since July 2015; and

Finally, hedge funds have been net sellers of $3.5 billion in equites this year. More than any other asset managers.

Talk about negative Alpha!

In all seriousness, there is a reason why we attempt to quantify buy side consensus in our best ideas. It's because if you are on the wrong side of a concentrated hedge fund bet that is unwinding, the stock is mostly definitely not going to see support at a "moving monkey" average.

On the macro front, our colleague Darius Dale has been closely investigating the consensus view of emerging markets. He's hosting a conference call tomorrow titled, “Is this a Generational Buying Opportunity in Emerging Markets?” No surprise, China will be a major focus of his call.

According to Darius, the key questions to focus on are whether the Chinese economy, its banking system and the yuan are as vulnerable to collapse as consensus believes? Many investors seem to be of the view that China requires a material devaluation of the RMB to stave off banking crisis and/or outright economic collapse. Some investors actually believe each of those outcomes is inevitable. If you’d like to join the call, please email .

Last week, The Economist published a chart, which we’ve republished in our Chart of the Day below highlighting private lending within the Chinese economy, and compares it to other economies before their deleveraging and crash. Based on this chart and measure, a Chinese crash seems inevitable. But like most things that appear in the mainstream media, the better question to ask might be whether this is already baked into consensus?

Over on the oil front, the recent price move seems to imply that the worst is behind oil. With drilling activity at an all-time low in the U.S., there is some credence to that story, but like most simple models, U.S. drilling is, but, one factor in the global supply and demand story. A few things to note this morning:

Iranian production climbed last month by the most in almost two decades following the end of sanctions. Iran increased output by 187,800 bpd to 3.13M in February, the biggest monthly gain since 1997; and

OPEC is revising downwards demand for its oil produced by its members as production outside OPEC remains ever resilient; and

The spread between Treasuries and high yield debt of energy companies has narrowed by about a 1/3 in the last month. The implication is that the market for energy financing is opening ever so slightly based on the recent crude rally.

Needless to say, we’ll stick to our bearish view of crude oil. Supply and demand fundamentals aside, it is going to be very difficult for oil to rally in the face of a U.S. central banking that is on the margin more hawkish than its global peers. A strong dollar is not good for the global commodities that are priced in it, like, say, oil.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 1.76-2.00%

SPX 1

VIX 16.01-21.15

USD 95.83-97.66

Gold 1

Keep your head up and stick on the ice,

Daryl G. Jones

Director of Research

Credit: The Economist

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Print

03/15/16 08:48 AM EDT

INSTANT INSIGHT | Oil and Gold Prices

Oil prices have had a nice run but with delusions dissipating and reality sinking in crude prices are slipping once again.

The recent stock market reflation rally was undoubtedly bolstered by a 27% ramp in oil prices. Since oil bottomed in February, Energy stocks (XLE) are up 15%. Then, on Monday, OPEC announced that demand would be less than previously thought in 2016 ... at the same time ... sidelined producer Iran boosted its output from 1 million barrels per day in January to 3.1 million. No small potatoes. That dashed the potency of previously discussed Saudi-Russia freeze talks.

The news for oil doesn't get much better from here, Hedgeye CEO Keith McCullough wrote in a note to subscribers this morning:

"Oilis down hard after failing at the top-end of what is now a $34.05-39.76 immediate-term risk range for WTI – and, again, if you’re thinking the Fed is going to be “hawkish”, don’t forget that means Dollar Up, Commodities Down – I’d stay with the better TREND setup than chasing Energy charts (i.e. Long Gold vs. Short Oil for 2016)"

Here's the latest on Gold from McCullough:

Want more insight on Gold and the Fed?

Bestselling author Jim Rickards (Currency Wars and The Death of Money) joins Hedgeye CEO Keith McCullough this morning at 11am ET to discuss his brand new book The New Case for Gold, along with global central bank policy, negative interest rates, currency wars and much more. Join us. It's free. (Click here for free access.)

Oil Down, Rates Down

Client Talking Points

JAPAN

If you’ve been bearish on the #BeliefSystem (central-market-planning) breaking down in Japan alongside us, congrats – Japanese stocks failed @Hedgeye TREND resistance overnight as the Yen popped (again) on a BOJ statement day. The Nikkei is down -0.7% to -10% for the year-to-date. It is not clear how the bulls could be trumpeting losing money year-to-date.

FINANCIALS

Financials lagged the U.S. Equity market all day long yesterday (they’re down -5.9% year-to-date and remain our favorite sector on the short side) and since rates failed at the top-end of our 1.76-2.00% risk range (UST 10YR) yesterday, it won’t surprise us if they lead the market lower alongside Energy today.

OIL

Oil is down hard after failing at the top-end of what is now a $34.05-39.76 immediate-term risk range for WTI – and, again, if you’re thinking the Fed is going to be “hawkish”, don’t forget that means Dollar Up, Commodities Down. We would stay with the better TREND setup than chasing Energy charts (i.e. Long Gold vs. Short Oil for 2016).

*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE.

Asset Allocation

CASH

60%

US EQUITIES

0%

INTL EQUITIES

0%

COMMODITIES

6%

FIXED INCOME

26%

INTL CURRENCIES

8%

Top Long Ideas

Company

Ticker

Sector

Duration

XLU

Utilities (XLU) remains the alpha generating trades in equities, year-to-date XLU is up 11.3% versus -1.1% for the S&P 500. Factor exposure is very important to us, especially when volatility is in a bullish TREND set-up and small cap, illiquid stocks continue to underperform. Here's another way to look at it:

Volatility

+ Illiquidity

+ Too many hedge funds chasing performance...

= #Pain

We continue to expect utilities to outperform the broader market given this current environment.

GIS

This stock is not likely going to go up 20% in the next year, but we do believe it will fare better than most in the consumer staples sector, especially as we head into an economic slowdown. That's why GIS is up 5.5% year-to-date versus down -1.4% for the S&P 500.

In the past few newsletters we've noted the effect Walmart is having on GIS, how its Yogurt business is faring against competitors, and how the company is broadening the distribution of its top 450 SKUs. On the M&A front, barring any screaming deals in the market place we don’t see General Mills (GIS) buying anything over roughly $1 billion in sales, just given the added complexity it would cause. So they will most likely continue the string of pearls approach in the Natural & Organic/Snacking categories. This does not rule out the possibility of GIS being bought, 3G & Kraft Heinz could be getting back in the mix as well, although it seems too soon for another deal this big.

TLT

Growth and inflation continue to decelerate in the Eurozone and globally. In other words, there is very little central planners can do to stop the cycle and the inevitable deleveraging that must take place in credit Long-Term Treasuries (TLT) remains the alpha generating trade in fixed income this year.

TWEET OF THE DAY

QUOTE OF THE DAY

What is harder than rock, or softer than water? Yet, water hollows out rock. Persevere.

Ovid

STAT OF THE DAY

In the U.S. 106,000 aluminum cans are used every 30 seconds.

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

The Macro Show Replay | March 15, 2016

Stock Report: Pimco 25+ Year Zero Coupon US Treasury ETF (ZROZ)

Takeaway:We added ZROZ to Investing Ideas on the long side on 3/11.

THE HEDGEYE EDGE

Our bigger picture cycle work helps contextualize the shorter-term asset price moves within their longer-term trends. Having a multi-duration process centered around the rate-of-change in Growth, Inflation, Policy (GIP Model) is a calculated and tested process.

In other words, we have a repeatable, math-driven process that prevents day-to-day market emotions from getting the best of us. That’s the name of the game if you’re a long-term investor looking to protect your wealth and remain sane in this volatile market environment.

Right now, our model flagged the third consecutive quarter of growth slowing to close out Q4 2015. Aside from a modest acceleration in Q1 of 2016, that model has the U.S. economy tracking squarely in QUAD 4 heading into Q2 (growth and inflation decelerating). Long-term Treasuries have repeatedly been the most telling signal of longer-term growth expectations.

INTERMEDIATE TERM (TREND)

Only longer-term investors who have been right on the direction of longer-term growth and inflation have been on the right side of long-term Treasuries, which outperform in a growth slowing environment.

Regardless of various attempts by policymakers to influence currencies and rates, if growth continues to surprise to the downside, the long end of the curve will continue to discount forward looking growth expectations. ZROZ is the most sensitive way to express this view with the discounting of longer-term cash flows.

LONG TERM (TAIL)

Slower for longer on growth has equated to relative outperformance for buy-and-hold investors in long-term sovereign bonds. One of the largest headwinds to our consumption-based economy (~70% of GDP) for the next several years is unfavorable demographic trends. The U.S. economy’s core spending group (35-54 year olds) is projected to contract through 2019. That fits with our big picture calls on U.S. growth slowing and hence lower for longer rates to the benefit of ZROZ.

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